Croydon council has become the first to seek emergency financial assistance from the government in the wake of the coronavirus lockdown, ahead of what is expected to be a flurry of local authorities requesting bailouts.
The UK’s cash-strapped local authorities are among the most stretched in Europe, according to a new report by Moody’s Investors Service, leaving them vulnerable to the economic contraction caused by the pandemic.
In May, central government gave £3.2bn of funding to all English councils, in two tranches, to help cushion the impact of the lockdown.
But with some councils demanding more help, the government has privately urged any authority facing the prospect of going bust to get in touch for “bespoke support”.
“A few will be speaking to the government as funding pressures start to bite hard,” said one Whitehall official.
Two Yorkshire authorities are understood to be under particularly close scrutiny from Whitehall. “Some other councils in London are in difficulties, although none as bad as Croydon,” said one local government figure.
In the last 20 years only one council — Northamptonshire county council in 2018 — has issued a “Section 114 notice” or an effective bankruptcy.
Croydon, a Labour-run borough in south London, in contrast said it had requested a so-called “capitalisation directive” from the government which would give it greater flexibility to use capital funds for day-to-day spending.
“Like local authorities across the country, Croydon council is facing unprecedented financial pressures brought on by Covid-19, which has seen plummeting income and millions in extra costs, on top of historic government underfunding,” the council said.
It added it has set up a financial review panel to identify cost savings, had implemented a hiring freeze and was looking at staffing levels.
The council is set to make up to 175 redundancies, and some senior management departures are expected within weeks, according to those involved in the negotiations.
In an email to colleagues seen by the Financial Times, Simon Hall, cabinet member for finance, blamed the crisis on “historic underfunding”, including spending cuts since 2010 of £100m annually.
The financial review would also look at “increasing fees and charges” and a reassessment of the capital programme, according to the email.
Mr Hall said the current budget had been prepared before the pandemic on what was already a “set of challenging assumptions”. An overspend of £49m in the first quarter was 90 per cent caused by the pandemic, he added.
The government would compensate for “certain categories of lost income” but had not yet set out its guidelines, the email said.
The government believes the council’s financial difficulties have been exacerbated by its spending spree on several commercial properties. But Mr Hall pointed out that investment properties were only responsible for £100m of its total debts of £1.5bn.
“While councils are responsible for managing their finances, we are working with the council to understand the range of financial issues they are experiencing,” the Department for Housing, Communities and Local Government said.
Croydon’s request for further financial assistance was first reported by Property Week.
The Local Government Association, which represents the sector, said councils were being “stretched to the maximum” as a result of the pandemic — having already lost 60 per cent of their funding since 2010.
It called on the government for further support to meet the extra cost pressures and cover the loss of income streams, such as business rates and council tax, in full to prevent painful cuts to services. The LGA has estimated a national shortfall of £7bn this year for the sector.
The report by Moody’s said the fallout from the pandemic would be felt by local government across Europe. But the rating agency said the lack of a financial buffer for UK councils and regional inequality was “likely to lead to more acute fiscal pressures on poorer UK local authorities.”